The first part of the bank's report shows: the government functioned well financially - "increased private income and moderated damage to GDP" • Debt ratio rose less than expected
"The government has functioned well economically."
Bank of Israel
Photo:
Oren Ben Hakon
It may be inevitable that taxes will be raised, the Bank of Israel estimates.
The Bank published yesterday (Wednesday) a concluding report for 2020 (Part I), which states that in view of the relatively low level of civilian public expenditure (excluding interest) and the reduction of tax rates in the years before the corona crisis, and for the purpose of financing the debt. "It may be necessary in due course to raise tax rates as well."
The report noted that the (government) fiscal policy responded to the crisis "with great intensity, mainly through transfer payments, intended to assist households and businesses", and that this government policy "increased disposable private income and moderated the impact on GDP".
The government has also provided guarantees for the provision of loans to businesses.
At the same time, the budget deficit increased to 11.6% and the public debt-to-GDP ratio rose from 60% to 72.6% - significantly lower than the early estimates at the beginning of the crisis, some of which warned of a triple-digit GDP-to-GDP ratio.
The Bank of Israel's monetary policy also responded strongly, with exports "playing an important role in mitigating the crisis's impact on the economy", mainly due to the continued rapid growth of advanced services exports - including high-tech industries: The surplus in the current account. "
According to the bank, the Israeli vaccination campaign "will enable the recovery of the economy. As the plague is restrained in the world, the world economy will also be able to recover, and thus activity in Israel will continue to accelerate."
The Bank calls for a speedy budget transfer for 2021 - a scenario that does not seem plausible now in light of the political stagnation that prevails even after the last election, and warns that even after the economy opens, the unemployment rate may remain "much higher than on the eve of the crisis".
According to the Bank, many of the assistance programs implemented during the crisis gave priority to assistance and compensation considerations over efficiency and incentive considerations.
"When emerging from the crisis, it will be important to stop these programs or reduce them and adjust their characteristics so that they do not hurt the incentive to work and do not perpetuate the existence of inefficient businesses," the report said.
"It is important to adjust the rate of withdrawal of plans to the rate of recovery, due to the damages involved in bringing forward or delaying this withdrawal."
Withdraw from the aid in moderation
The Bank of Israel notes that in some of the programs, such mechanisms have already been implemented, such as the stipulation of unemployment benefits in the unemployment rate in the economy and the stipulation of assistance to businesses in the rate of reduction in revenue.
"The crisis has highlighted the lack of a broad economic network that can be operated quickly in times of crisis, and the lack of adequate data infrastructure required for the effective design of targeted assistance programs," they warn.
The report noted that with the exit from the crisis, "the need to focus again on the fundamental problems of the economy, especially low productivity, productivity gaps between sectors and inequality, will rise again."
The importance of infrastructure
The report noted that some of these problems were exacerbated during the crisis - for example due to the gap in its impact between educated and low-wage workers, and given the importance of education and skills for online activities:
Increasing investment in the economy and in particular in infrastructure, especially in public transportation infrastructure, is also required to increase productivity.
The crisis also underscored the importance of communications infrastructure.
To all of this must be added the challenge of maintaining a rate of construction starts that is consistent with the needs of the population over time. "